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When discretionary bonuses become entitlements

24 February 2020

#Workplace Relations & Safety

Charles Power

Published by Charles Power

When discretionary bonuses become entitlements

Depending on the words of a bonus clause in an employment contract, an employee may be entitled to an incentive payment or bonus as a contractual entitlement.

The mere fact that a promise to pay the bonus is discretionary does not necessarily mean the obligation is non-contractual, or uncertain so as to be unenforceable.

Where a clause providing a bonus or commission is subject to a discretion (for example, by using words such as ‘entirely within the discretion of’), and the bonus is to be assessed against set objectives, the employer cannot choose arbitrarily, capriciously or unreasonably not to pay the bonus where the set objectives have been satisfied.

These principles were canvassed recently in the ACT Supreme Court in the decision of Subasic v Hewlett-Packard Australia Pty Ltd ([2020] ACTSC 2). This case arose from a claim of breach of employment contract by a sales executive seeking $309,750.39 in commission (plus interest), which she alleged was payable as a result of sales she made over a six-month period.

The salesperson was paid in the form of a base salary plus commission. If she achieved a specified sales quota, she earned extra incentive calculated at a more generous rate. The employer set out the basis for this in a policy.

During the six-month period that was the subject of the claim, the salesperson exceeded her sales target or quota by more than 500 per cent. In response, the employer decided to retrospectively cap the amount of the incentive payment payable, reducing the amount that would otherwise have been paid by a substantial degree.

The salesperson’s breach of contract claim was based on an express entitlement to incentives in accordance with certain parameters set out in a sales letter covering the relevant period, and alternatively on implied contractual duties of good faith and co-operation. The employer’s defence was that the employee was not entitled to the amount of incentives because the employer was entitled to exercise a discretion to limit or cap the amount in accordance with the salesperson’s employment contract and conditions.

The Court rejected this defence and found for the salesperson. The Court ruled the discretionary element of the incentive scheme did not negate the contractual obligation to pay an employee who participated in the scheme according to its terms. The discretion to change or amend the scheme was to be exercised ‘honestly and conformably with the purposes of the contract’. The employer was not permitted to decide arbitrarily, capriciously or unreasonably that it need not pay an incentive payment where the set objectives had been satisfied.

The Court found the employer’s discretion was limited in this way under the express terms of her employment contract, and in the alternative by operation of an implied contractual term of good faith. The Court observed that it would defeat the commercial purpose of the incentive clause if it were construed as permitting the employer to introduce an incentive program, expressly remove a cap on incentive payments, market the program as rewarding strong performance, and then when employees performed strongly, exercise its discretion to refuse to pay the incentive specified.

Author: Charles Power

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Charles Power

Published by Charles Power

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